On Thursday, the company's management team tried to explain to Wall Street how it hopes to turn things around in 2005. But it won't be easy to put a smile back on the face of its freckled icon.

On Wednesday, the nation's third-largest restaurant chain reported a loss of $135.7 million for the fourth quarter and a same-store sales decline of 4.3% for the quarter at its U.S. company-owned stores.

On Thursday, the fast-food chain predicted 2005 earnings of $2.17 to $2.23 a share excluding one-time charges, up 10% to 13%. Analysts surveyed by Thomson First Call had pegged earnings at $2.44 a share.

The news sent shares of Wendy's down $1.03, or 2.7%, to close at $37.72.

In the past year, rivals McDonald's (MCD) and Burger King have essentially figured out how to out-Wendy Wendy's. It's a formula that Wendy's invented: tasty new products, higher-quality grub and clever advertising.

Meanwhile, Wendy's has slipped. "We are not pleased with our earnings performance," CEO Jack Schuessler said in a statement. He was traveling to New York on Wednesday for today's meeting, and — through a spokesman — declined to be interviewed.

There are early signs that things might be improving at Wendy's. Its January same-store sales rose slightly, and February is looking better, too.

It has a new entree fruit salad that's expected to attract new customers. And its new adult combo line — which lets folks substitute a salad, baked potato or chili for fries — could become a hit.

The Tim Hortons coffee shop chain it owns is going gangbusters in the USA — with 9.8% same-stores sales growth in 2004.

But Wendy's has lost some luster with the fast-food-eating public.

"Wendy's set a bar — and the other chains are now beating them at their own game," says Bob Sandelman, whose firm, Sandelman & Associates, tracks consumer restaurant preference.

"Analysts are as confused about this as the rest of the world," says John Glass, analyst at CIBC World Markets.

"It seems that the guy with the latest hot product wins."

Here's what industry experts say Wendy's must do to right itself and what Wendy's said Thursday it will do in some of those areas:

•Fix the menu. Taking a play out of Wendy's playbook, McDonald's and Burger King introduced new salads and tastier menu items in the past two years. "It may be time to rethink the menu," says Mike Nuckolls, business editor at QSR magazine.

On Thursday, Schuessler said that the company's recent move to allow customers to forego french fries in favor of salads, chili, or a baked potato in combination meals has already helped sales.

New menu items this year will include a Mediterranean Chicken Salad and a Mozzarella Cheeseburger. The company is also testing deli-style sandwiches in some U.S. markets and hinted at testing a breakfast menu "in a year or so."

New menu choices are also coming at its Tim Hortons.

•Fix the ads. For years, Wendy's relied exclusively on founder Dave Thomas as its endearing spokesman.

But a huge void surfaced after Thomas died in 2002, and it's never been filled. Since then, consumer interest in Wendy's ads has slipped behind McDonald's and Burger King, Oakes says.

The recent "Mr. Wendy" campaign was a flop, so the company brought back Thomas' image in recent ads.

Late last year, it hired Ian Rowden — a former Callaway Golf and Coca-Cola ad executive — to oversee advertising. Rowden is expected to shake things up.

Poor advertising is "a lot easier to fix" than poor operations, Oakes says. "They're still regarded as the gold standard in execution, operations and drive-through times."

•Go back to basics. The key to McDonald's turnaround was going back to basics. Wendy's needs to do the same, Nuckolls says.

"It's gotten away from the single, double and triple burger. When's the last time you saw an ad for those?"

•Drop the distractions. Since purchasing the Mexican-style chain Baja Fresh in 2002, Wendy's has had nothing but headaches. Even after closing underperforming stores, same-store sales at Baja Fresh were down 6.3% in 2004.

By the end of the second quarter, Oakes expects Wendy's management will make a decision on whether or not to dump the brand.

The company has retooled the menu and closed 20 of the lowest-performing Baja restaurants among more than 300 stores. Baja's finances should improve enough to make it "neutral to earnings in 2005, exclusive of the financing costs associated with its acquisition," Schuessler said Thursday.

•Keep an eye on the clown. "McDonald's is better at imitating them than ever before," Glass says.

•Ramp-up research and development. With McDonald's and BK spinning out hot new products, Wendy's needs to do the same. "There's no silver bullet," Glass says. "But they need to shorten the time to market of their new products."